Mini Tenders

Investment News carried an article about the tender offers for shares of American Real Estate Investment Trust and Apartment Trust of America.  The gist of the article is that these "mini tenders" (so called because they are the offer is for less than 5% of the outstanding shares) take advantage of the illiquidity of the shares of a non-traded REIT, and the limited information on share value from the REIT, to purchase shares for a price that is well below some fair value.  To his credit, Bruce Kelly, the author, writes a much more balanced story than the headline implies.  He quotes representatives of both organizations making the offers.  Don DeWaay of DeWaay Financial Network makes a sober and compelling case in favor of the practice of mini tenders.

These mini tenders are not inherently good or bad.  Some combination of illiquidity for the security, incomplete valuation information, and market conditions create an environment in which an aggressive opportunistic investor believes that he will be able to buy a sufficient number of shares at a discount to current value large enough to justify the expense of compiling a contact list and communicating the offer to investors.  For example, I would wager that shares of Inland American Real REIT have a current value much closer top the $8.03 that insiders paid recently than the $4.00 being offered in the tender.  The tenders may point out negative issues and items, including the fact that the shares are expected to be illiquid for an extended period, but most of these issues should have been reasonably foreseeable at the time of investment.  Generally speaking, investors need to be concerned with a mini tender only if that investor's circumstances have changed so drastically that the investment must be liquidated immediately, and then only after exhausting all other potential liquidity sources.

A good friend publishes The Rational Realist, a blog with a focus on real estate investing especially syndicated funds.  He notes that Total Realty Trust was able to meet (on a pro rata basis) just 7% of liquidation requests during 2010.  This ahead of the required share valuation that is scheduled in 2011.  The REIT's inability to meet the demand for liquidity is likely to signal to a tender fund an opportunity to pick up some shares of Total Realty Trust on the cheap.  Get ready to field the calls from your clients who own shares in this REIT.